Procurement Fraud

On Tuesday, Reuters reported that the special investigator general, Arnold Fields, for Afghanistan reconstruction (SIGAR) announced that he would step down on February 4. After retiring as a Marine Corps general, Fields spent three years overseeing SIGAR and, supposedly, kept track of the billions of U.S. dollars spent on reconstruction in the war torn country. During Fields’ tenure, about 40 percent of the $56 billion in funds allocated to civilian reconstruction projects in Afghanistan - $22.4 billion – went unaccounted for.

A bipartisan team of Senators led by Tom Coburn (R-OK) and Claire McCaskill (D-MO) spent two years investigating SIGAR. In spite of Fields’ deft ability to deflect and reframe the Senate’s inquiries, the committee honed in on the fact that only four of the 7,000 contracts in Afghanistan were audited. In September, the Senators called for Fields’ resignation, citing excessive evidence of incompetence, mismanagement, and tax dollar misuse.

While President Obama has yet to accept Fields’ resignation, the act is a formality at this point. With the budget for Afghani reconstruction increasing next year and an important post to fill, it is critical that Obama makes a sound decision in appointing a new overseer of the reconstruction project. An aggressive, vigilant individual must take over for Fields and end the rampant corruption in war torn Afghanistan. A nation suffering under mounting debt cannot continue to allow billions and billions of tax payer dollars to walk away, unaccounted for, especially in a war zone where the lost money could be funding those that oppose the efforts of the US military.

International Developments Solutions was recently awarded a State Department contract to provide protective security in the Israeli controlled West Bank. The one-year contract was awarded on January 3 and contains the possibility for four more one-year renewable options. The total value of the contract could reach $84 million over five years.

International Developments Solutions is part of a joint venture that includes U.S. Training Center Holdings – the same group that recently purchased Xe Services, formerly known as Blackwater Worldwide.

The training for the new contract will almost certainly be held at the USTC's facility in Moyock, North Carolina that previously served as the headquarters for both Blackwater and Xe Services.

This contract marks the third that Blackwater-associated organizations have won since last February when Sen. Carl Levin (D-MI) asked the Attorney General to take a closer look at Blackwater. In June, Xe Services won a $100 million contract from the CIA to provide protective services in Afghanistan and in October Xe partnered with another company to secure a piece of a $10 billion State Department contract for worldwide protective services.

We can probably expect more government contracts for the remnants of Blackwater as its new owners try to scrub away all traces of Erik Prince, the controversial founder of Blackwater. U.S. Training Center Holdings bought Xe in mid-December for a reported $200 million. The sale removed Prince's equity stake in the company, as well as any operational or managerial role he had. In reporting the sale, The New York Timesnoted that the US State Department had threatened to cease awarding contracts to the company – regardless of what it called itself – so long as Prince remained as the owner of the firm.

However, the extent to which Prince is stepping away from the company is questionable. Prince will still have a financial interest in the company’s future. Part of the sale dictates that Prince will receive payouts depending on the company’s performance over the next few years.

Additionally, one of the lead investors with USTC Holdings – Jason DeYonker – has had a long history with both Prince and Blackwater. DeYonker was an advisor to Prince during the founding of Blackwater. He played a role in the development of the company's business plan and also helped in the negotiations of Blackwater's first contracts with US government agencies. DeYonker also managed the Prince family's money from 1998 through 2002.

The Project on Government Oversight (POGO) is a small Washington outfit engaged in a massive job: Keeping an eye on government contractors that collectively get paid over a half trillion dollars a year to carry out the public's business. Many of these contractors are exceptionally well-connected inside the Beltway and lubricate the political process with millions of dollars in campaign contributions. This can make it hard to ensure they are subjected to tough oversight.

But there is another problem with some of these contractors: They are so big and undertake jobs of such scale and complexity that they are indispensable to government operations. So when they do something illegal -- like ripping off taxpayers or polluting the environment or engaging in bribery -- it is hard to effectively punish them because the ultimate sanction of barring them from government work is seen as unrealistic. Think of this problem as a variation on the "too big to fail" dilemma.

What does this mean in practice? It means that certain large contractors get away with stealing from the government again and again. More commonly, though, it means that companies guilty of illegal behavior that is not related to their contract work continue to do business with the U.S. government. As reportedin the New York Times recently, POGO has compiled a database of contractor violations going back 15 years. And what a sorry record it is, showing that the top 100 contractors have paid nearly $20 billion in fines for a whole range of abuses, such as fraud, environmental violations, and falsifying records. (You can check out the database at www.contractormisconduct.org.)

The database includes some shocking information. The defense contractor Boeing, for example, has paid $1.6 billion in penalties since 1995 for 39 instances of misconduct -- but is still a key U.S. contractor. Other top defense contractors, like Northrup and Lockheed Martin, have also each paid hundreds of millions in penalties for dozens of illegal acts. Pfizer has paid an astonishing $2.9 billion to settle government suits, mostly related to the illegal marketing of drugs, but still gets government work. The energy giant BP has been penalized for 53 violations to the tune of $1.6 billion -- yet still gets work from Uncle Sam.

In effect, the U.S. government is doing business with career criminals. Why? Because government officials view these contractors as indispensable. Even before the Gulf oil spill, EPA officials wanted to ban BP from government work until it addressed environmental problems. But the Pentagon objected, saying that BP was the biggest supplier of fuel to the armed forces and banning it from government work would create all sorts of disruptions.

That seems like short-term thinking. Curbing widespread lawlessness in the corporate sector requires using all the tools that the government has its disposal. And because getting criminal convictions and sending executives to jail has proven elusive, in large part because of the complexity of these cases, disbarment from contract work is all the more important as a means of punishment.

The latest revelation in the CityTime corruption case offers yet more evidence that the Science Applications International Corp., or SAIC, may have an unethical organizational culture. SAIC is one of the largest and most well-connected government contracting firms in the country, with 45,000 employees worldwide. It's incompetence in handling the CityTime contract, with hundreds of millions of dollars in cost overruns, appears to be part of a pattern -- with other clients, like the FBI, reporting similar experiences.

But now comes evidence of something darker. According to a files unearthed by New York City Controller John Liu, SAIC tried to exert improper influence over the top city official monitoring its work. Juan Gonzalez, the New York Daily News reporter who has been on top of this story all along describes the new revelations about SAIC:

"I appreciated meeting with you to discuss SAIC issues that are pending with the Office of Payroll Administration," Valcich wrote. He then apologized to Russell "if I seemed rude and abruptly shortened your discussion on a future post city-employment position with SAIC."

"[I]t is inappropriate to discuss any post employment with a company that I do business," Valcich warned him.

Valcich went on to say that he was "flattered you would consider me for such a position with SAIC but there are restrictions due to the city's conflicts of interest rules."

Such restrictions include a lifetime ban against working on the same "matter" that a city employee handled while in government.

Wow. Of course, those familiar with how big contractors and lobbyists corrupt government officials will not find any of this surprising. There is a long history of companies using offers of lucrative jobs to exert improper influence. These deals are simple and often hard to scrutinize: Do our bidding now, companies say, and we'll give you a job paying a million dollars a year (or whatever) down the road. A big focus of ethics reform in recent decades has been to crack down on "revolving door" enticements.

SAIC's tactic in this episode raises questions about its corrupt dealing around other contracts. Stay tuned for more on that topic.

Gonzalez's latest article on the subject of SAIC includes a kicker near the end:

Amazingly, despite years of red flags on the CityTime project, the Bloomberg administration confirmed yesterday it recently awarded a new $40 million contract to SAIC.

So what is it about Michael Bloomberg and SAIC? Why is a mayor so famously focused on efficiency so forgiving to a contractor that is so ineffective? That is a question that deserves closer attention.

It is often said that if government could just run like a business, taxpayers would save billions and the public sector would be more effective. If only that were so. In fact, corporations are just as capable of fraud, waste, and abuse as any government agency -- indeed, even more so since there is much less oversight of private executives than public officials. And ironically one of the reasons that government sometimes does appear ineffective is that private contractors have failed to deliver on their promises.

The staggering corruption case in New York City around a new computerized payroll system shows these truths on display. Not only did private consultants steal an estimated $80 million for the city government, but the main company in charge of the contract -- Science Applications International, Inc (SAIC) -- appears to have been egregiously incompetent and dishonest. Moreover, they remained so even after being sharply criticized by city officials, as revealed by the emergence of a 2003 letter written to SAIC executive Mark Hughes by Richard Valcich, then executive director of the City's Office of Payroll Administration.

Valcich's tone suggests a public official who is dumbfounded by how a major company could be so ineffective. "SAIC has repeatedly been late on virtually every deliverable. The inability of SAIC to deliver on time has resulted repeatedly in wasted city resources. . . . The City has found that SAIC's commitment to quality is almost non-existent and is reflected from the top down."

Richard Valcich complained that the City had spent $35 million and had no system to show for its funds. Over subsequent years the cost rose to $700 million and there still isn't a completed system. The greed and gouging in all of this is staggering. Earlier this year, the New York Daily News found that there were 230 consultants at SAIC being paid an average of $400,000 annually -- with this money coming from a city where two million people live in poverty.

Why didn't the Bloomberg Administration move more quickly to kick SAIC off the job? Part of the answer is surely about how large contractors can be irreplaceable because they do things that other companies cannot do -- operating, in effect, as monopoly providers. (Think Halliburton, which has unique capacities for large-scale work in war zones.) But my guess is that there is more to this scandal, and that it involves questionable political influence by SAIC -- which is hugely well-connected in Washington and other power centers. (Think Halliburton again. SAIC's board of directors has included two former secretaries of defense and a former CIA director.)

CityTime is not the first big government contract that SAIC has screwed up. In 2001, the FBI contracted with SAIC to create a new database system and paid $122 million for a project that was an utter disaster. As FBI Robert Mueller would testify to Congress: "When SAIC delivered the first product in December 2003 we immediately identified a number of deficiencies – 17 at the outset. That soon cascaded to 50 or more and ultimately to 400 problems with that software ... We were indeed disappointed."